Partnerships

Restriction on losses of all partners:

Sideways relief against non-trading income is restricted to the greater of £50k or 25% of and total income.

The cap does not apply for offset against profits from the same trade or CG.

Restriction on losses of non active partners:

The sideways relief for David’s trading losses is restricted to the lower of:

a) The unrelieved contribution to the partnership in early tax years (applying in the tax year of commencement and next 3 tax years)

b) An overall cap for non-active partners of £25,000 for any tax year

Unrelieved contribution = capital, undrawn profits, amounts paid to ps which has been wound up

LLP summary:

• LLPs have been described as “a company on the outside but a partnership on the inside”.

• The LLP must have at least two designated members – these are very similar to directors of companies. They are the members who are responsible for the management of the LLP.

• From a legal perspective, LLPs are similar to limited companies and are subject to the same  accounts  and  audit  rules  as  companies.  An  LLP  has  limited  liability  for  the  debts  and  obligations  of  the  LLP  incurred  while  they  are a member; Their liability is limited to the amount of capital they contribute to the LLP plus any further amount they have agreed to pay if the LLP is wound up.

• For tax purposes the LLP is treated in the same way as a traditional partnership. Instead the  profits  of  the  LLP  are  allocated  to  the  members who then pay income tax on those profit.

LLP losses treatment:

Active = restricted to each member's “contribution” to the LLP

Non active = 25k or unrelieved contribution (1st 4 years this is capital and amounts paid if ps wound up), (after 4 years capital and amounts agreed to pay on wind up)

Mixed partnership summary:

Consists of both partners who are individuals and partners who are non individuals eg a company.

·         2 comps are required for p’ship; 1 using income tax rule, 1 using corporate tax rules

·         Can’t use cash basis or claim for flat rate motor expenses, no AIA available

Anti avoidance legislation for mixed partnerships

• Excessive profit allocation to corp partner

• Loss allocation in mixed p/s

• Transfer of income streams through p/s

Mixed partnership - Excessive profit allocation to corp partner

Corporate p’tnr share is excessive/ individual p’tnr has power to enjoy part of corporate p’tnrs share/ reasonable to assume % ratio only for purpose of tax reduction.

o    If all above apply; individual p’tnr share is increased by amount of excess profits they have power to enjoy

o    Excess profits= amount above ROC using commercial interest rate plus arm’s length consideration for services the co. provides to p’ship less amounts received

o    If services involve other p’ship members then not included in above calc

Mixed partnership - Loss allocation in mixed p/s

Losses being allocated to individual p’tnr rather than corporate p’tnr; no tax relief

Mixed partnership - Transfer of income streams through p/s

Where disposal of a right to income eg, transfer p/s interest to co- consideration given is charged to income tax on the transferor – MV is used if substantially <MV

P/S CGT: 100% disposals between partners

·       Calculate as though all partners are disposing using MV at disposal

·       Partners giving up the asset: CGT charged immediately

·  Partner receiving the asset: deemed purchased at MV less notional gain

P/S CGT: Transfer of asset in

·       Transfers of assets to p’ship treated as part disposal of asset

·       % disposed of depends on partners share of capital sharing ratio

·       Proceeds = amount credited to partners capital account

·      Less cost (orig cost x A/A+B)

P/S CGT: % ratio change (no revaluation):

·       Treated as a disposal for partners % ratio going down and vice versa

·       Disposal and acquisition done at NGNL

·       If no reval then book value = historic cost \ proceeds = cost

P/S CGT: % ratio change (revaluation):

·       For disposing partners; CGT is calculated based on:

o   Proceeds = revalued asset value * % share decrease

o   Cost = original cost * % share decrease

·       Base cost c/f:

o   Acquiring partner: revalued asset value * % share increase

o   Disposing partners: historic cost * % retained

P/S CGT:

·       CGT charged on individual partners – not on partnership

·       Proceeds & costs allocated per capital sharing ratio

·       Claims eg BADR, Rollover are made by individual partners